Imagine getting access to extra cash while simultaneously lowering your monthly mortgage payment. That is exactly what a refinance loan on your mortgage can do. Let's look at the top 5 reasons for refinancing:
1. Lower Payments
When you purchased or last refinanced your home, your interest rate was determined by the current financial environment and the loan program that you choose at the time. However, interest rates fluctuate. By refinancing your mortgage when interest rates are lower, you can exchange a higher interest rate for a lower one, which will lower your monthly payment and give you more disposable income to pay other bills or put into a savings plan.
In addition, if you’ve enhanced your credit score, your equity, income, or other lending factors, then you may be eligible for a better interest rate.
2. Cash-out Refinancing
One way to put more money in your pocket is to tap into the equity you've built in your home through a cash-out refinance. With a cash-out refinance, you can refinance for an amount higher than your current principal balance and take the extra funds as cash. This can give you money for everything from remodeling your home, paying off high-interest rate bills, sending your kids to college, or reinvesting the equity into other investments.
3. Shorten the Length of Your Mortgage
Another advantage of home refinancing is that you can shorten the term of your mortgage which may save you thousands of dollars in interest payments over the life of the loan. This can allow you to save or reinvest this capital. Also, if the refinance rate is lower you may build up equity in your home faster,
4. Private Mortgage Insurance (PMI)
If you were unable to make a down payment of 20 percent when you originally purchased your home, you may have had to purchase private mortgage insurance (PMI). If your house has appreciated since then, and you've steadily paid down your mortgage, your equity may now be more than 20 percent. Refinancing may help you remove the PMI and lower your monthly payment.
5. Exchange an Adjustable Rate (ARM) for a Fixed Refinance Rate (FRM)
ARMs make a lot of sense for a large number of borrowers with certain financial goals for a specific period of time. However, as interest rates fluctuate, that adjustable rate will eventually reset to a different interest rate, which is variable and depends upon the interest rates at the time.